Mar 26, 2012, 03.33 PM | Source: CNBC-TV18

Why is govt raising debt to buy PSU shares, asks Ex-Fin Sec

Poor investor response to the recent ONGC stake auction has pushed the government into a corner, looking for ways to meet its divestment target for FY13.

Ashok Jha , Ex-Finance Secretary, GoI
Poor investor response to the recent ONGC stake auction has pushed the government into a corner, looking for ways to meet its divestment target for FY13.

And to tackle this, the Centre on Friday cleared the proposal to dismantle the Specified Undertaking of the Unit Trust of India (SUUTI).

Taking all precautions not to fail in its Rs 30,000-crore disinvestment target, SUUTIís sizeable assets under management will be transferred to a new entity.

With regards to the concerns of SUUTIís liabilities in terms of the UTI claims, former SUUTI administrator SB Mathur tells CNBC-TV18 that someone will have to carry forward this liability but it is a very small amount that may arise from year-to-year which is not a major concern.

SUUTI owns significant stakes in ITC, L&T and Axis Bank, together valued at Rs 32,000 crore. The new asset management company (AMC) will hold all these assets which in turn will pledge the shares with banks to raise money. This then can be used to buy the governmentís stakes in PSUs.

Ex-Finance secretary Ashok Jha feels the government would be better off divesting SUUTIís stakes in these companies in tranches.

Below is an edited transcript of their interview on CNBC-TV18. s for more.

Q: There is a little bit of confusion on how exactly this new national asset management company will go out and leverage the stocks and raise money, who will service the debt? Are you clear about the modalities of raising money and buying back PSU stocks?

Mathur: This is frankly a more banking issue but I suppose if a company has these shares in its name, as per RBI guidelines and what is permissible to the bank, they should clearly be able to raise 50% of the value of the shares as debt and perhaps give it to the government for use as part of the Budget.

Q: Do you think banks will be in a position to lend? Who will service that debt eventually every year?

Mathur: The companies will have to service the debt and depending for how long the debt is and what is the debt burden, they will work out the economics. After all there is a lot of income coming in from companies. So that is a matter of detail which can be worked out.

Q: There are also some concerns with regard to SUUTIís liabilities in terms of the UTI claims. What is your sense of how large that figure is in terms of how much the government will have to provide towards liabilities?

Mathur: It is a very small amount. It is not one single large amount. It comprises a few thousands or perhaps tens of thousands of people who have not claimed their money. So it is unlikely that the huge amount will be payable. Ever since I was the administrator five years ago, we have been contacting these people asking UTI offices to contact people personally at the last known address given. Of course, someone will have to carry forward this liability but a very small amount may arise from year-to-year which is not a major concern.

Q: Our figures indicate it could be as large as 1,700 crore. Would that be an accurate assumption?

Mathur: The total amount of pay is definitely 1,200 crore and thereabouts. I donít have the exact figure right now but the point I am making is that the entire liability will not arrive in a single year or two years because huge efforts have already been put in and many attempts have been made to contact these people at their last known addresses, newspaper adds have been put out but they have not come back. They have come back in small numbers and as far as cash management is concerned, it is not likely to be much of a concern for any outfit whether it is SUUTI or the successor company.

Q: Is it a feasible plan or are there too many procedural problems in implementing it?

Jha: No, if you are referring to the plan for shifting the assets from SUUTI to some other company and then that company is leveraging itself to take loans from banks basically to buy shares of PSUs, it is feasible but I for one am unable to understand why we are going about it in this circuitous route because if the intention is to enable this entity to buy shares of PSU, they could do so directly by selling these shares, realizing Rs 40,000 crore or so and then using that money to buy PSU shares.

Q: Probably they think that this stock may not be easy to sell in one tranche in the market or they do not want to let go of this stock because they believe that these stocks are far more valuable than they are and selling it at this point in time may not be the right thing to do. Do you think these could be the concerns which could be preventing them because the route is rather circuitous?

Jha: I donít know. There is no need to sell the stocks immediately. One could sell it in tranches over a period of time, over a period of the next six months depending upon when the stock market rises a little more. I donít see why they are taking this circuitous route because to my mind a simple solution is always much better and plus they will be able to get more money.

Right now, at the most they will be able to garner about 50% of the market price of these shares, which maybe little less than Rs 20,000 crore whereas if they sell the stock and I donít think the argument that these stocks are very valuable therefore one needs to keep them, these stocks are after all mainly of Axis Bank, ITC and L&T. These are not companies where the government needs to have a strategic interest. So instead of keeping these stocks lying idle, it is much better to make them work.

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